The outlook for inflation and for inflation-sensitive financial instruments is still highly uncertain. Note that this prognosis includes TIPS on the bond side and certain inflation-sensitive stock groups on the equity side.
The world’s mature economies have been trying to get inflation up to 2% or higher for many years. They’ve had no success. An example is cited by my friend Jim Bianco, of Bianco Research. Jim wrote this on November 29th:
“The Fed instituted its inflation target in January 2012, targeting a year-over-year PCE at 2%. The Fed can contort themselves all they want, but they have not been successful in hitting this target. In the eight years since they adopted it, core PCE has been above target exactly four months, with the highest reading in July 2018. Headline PCE has been above it more often thanks to rising energy prices. Looking forward, inflation expectations suggest the Fed will struggle to hit their 2% goal. The two surveys of inflation expectations, New York Fed and University of Michigan, are both plunging to new all-time lows.”
We track many measures of inflation at Cumberland. They are mostly confirming Jim’s view, although there are some high-frequency indications that suggest a little more inflation could be forthcoming in 2020. We think some more inflation could show up in 2020 if we didn’t have the Trump Trade War dynamics (wildly inconsistent tweets included) interfering with economic cycles. Instead we have sluggish capital expenditures as business agents defer decisions because of high and rising Trump uncertainties. We do NOT expect Trump to change his behavior. We do NOT expect the sluggish capex outlook to change.
The forces are building on the monetary side for additional inflation, but it takes a catalyst for the transmission of heavy monetary expansion into the general price level. We do see warning signs of excessive asset inflation, and those appear in many types of assets.
The Federal Reserve Banks of Cleveland and Dallas maintain public inflation series updates, which are available to the general public with email notices of the updates. (See https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx and https://www.dallasfed.org/research/pce/inflation.) Both reserve banks are dedicated to providing the most accurate and timely updates. We subscribe to their releases and read them on receipt. We encourage clients, consultants, and general readers to do the same.
For 2020, the outlook for inflation is something around 1.5% to 2%, but there is some chance a drift above 2% can occur IF we don’t have shocks.
Read the full series of “Year-End & 2020 Forecast Notes” by David R. Kotok at this link (updated as they are published):
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